Wednesday, December 31, 2008

GETTING THE RIGHT TOOLS

On his way out the door, Treasury Secretary Hank Paulson gave a plaintive interview to the Financial Times (See “US lacked the tools to tackle crisis, says Paulson, 12/31/08).

Among other things, the secretary is quoted as saying:

• “… we’ve done all this [in response to the financial meltdown] without all of the authorities that a major nation like the US needs.”• “We’re dealing with something that is really historic and we haven’t had a playbook. The reason it has been difficult is first of all, these excesses have been building up for many, many years. Secondly, we had a hopelessly outdated global architecture and regulatory authorities …in the US.”• Future efforts should aim at “better and more effective regulation.”• “I am sure I am going to look back … and think of all kinds of things I wish I had done differently.”

On a personal level, I feel deep sympathy for the secretary and many of his colleagues who have had to preside over the dismantling of a system that earned them great wealth and sterling reputations. That must be painful and more than a little confusing.

However, I would like to ask Mr. Paulson whether every one of the statements made above might not apply equally to his failed policy to contain mercantilist currency policies. Haven’t the resulting imbalances – trillions of excess currency reserves and other assets in the hands of mercantilist governments – been building for years? Haven’t we lacked the “authorities,” i.e. an effective IMF and WTO as well as national policy tools, to deal with the problem? Don’t we need “better and more effective regulation” to manage the problem?

Paulson’s insistence that he had the tools needed to end monetary misalignment stands in stark contrast to his lamentations regarding financial fraud and failure. He’s wrong on the former for the same reasons as he’s right on the latter. The new administration should scrap this part of Paulson’s playbook and take a fresh approach.